The U.S. Federal Reserve just released its semiannual Financial Stability Report. The report did not strike a bullish tone for U.S. stocks... In the words of the Fed... Across most asset classes, valuation measures are now high relative to historical norms. Since the May 2021 Financial Stability Report, equity prices rose further.
I don't agree with much the federal government has to say these days, but I agree with that. The market is expensive. Warren Buffett's favorite stock market indicator - aka the "Buffett Indicator" - currently suggests that the U.S. stock market is perhaps the most expensive it has ever been in recorded history. The Buffett Indicator divides the total valuation of the U.S. stock market by the GDP of the country. On that basis, the U.S. stock market is 72% higher than the historical trend. Getting back to the trend line would therefore require U.S. stocks to drop by 42%. That wouldn't be a minor decline - it would be consistent with history's major stock market crashes. The Fed acknowledged as much in its Financial Stability Report, saying... Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall.
You have to admit that it's a little funny. The Fed has single-handedly sent the stock market soaring by injecting massive amounts of money into the system, keeping interest rates at 4,000-year lows and purchasing securities... and now it's warning us that assets are expensive and a major correction could be coming! You built the bubble and are now telling us that it could pop?! Gee, thanks. It's funny, but the Fed's warning is still worth heeding. Overall, the U.S. stock market is very expensive. Fortunately, we have other options... |
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